8883 / What determines whether health coverage offered by an employer is “affordable” under the Affordable Care Act?
For purposes of the premium assistance tax credit (see Q 8849), employer-provided health coverage is deemed to be “affordable” if the taxpayer’s required contribution toward the annual premium cost of self-only coverage does not exceed 9.02 percent (as indexed for inflation for 2025, the amounts were 8.36 percent in 2024, 9.12 percent in 2023, 9.61 percent in 2022, 9.83 percent in 2021, 9.78 percent in 2020, and 9.86 percent in 2019) of the taxpayer’s household income (see Q 8850).1
Planning Point: From a practical perspective, the increase in the affordability threshold means that the employer can require employees to contribute more and still avoid ACA penalties under the employer mandate.
Any additional premium contributions that the taxpayer is required to make for family coverage are not included in determining whether the health coverage is affordable.
Planning Point: So far, the IRS has yet to provide guidance on whether employers will be subject to new obligations under the now-final regulations that would fix the so-called “family glitch” for determining affordability under the ACA. The final regulations provide that the affordability of employer-sponsored coverage for the employee's family would be based on the amount the employee would be required to pay to cover both the employee and eligible family members, rather than the individual employee alone. Under the new rule, family members are disqualified only if the cost of family coverage is less than the annual threshold. "Family coverage" means any employer plan that covers related individuals other than the employee (including self-plus-one plans). The regulations also create a separate minimum value rule for family members, so that they do not lose premium tax credit eligibility if the employer plan does not provide minimum value to the family members (regardless of cost). The regulations are effective for tax years beginning after December 31, 2022.
There currently is not any new mandate for employers, so the employer's obligations and penalty exposure would continue to be based on whether the employee's self-only coverage is deemed affordable. However, it is possible that employers could become subject to additional reporting requirements in order to determine whether the health plan is affordable at the family level.
If an employer offers multiple health plan options, the affordability test applies to the lowest cost plan in which the taxpayer is eligible to participate.2
1. IRC § 36B(c)(2)(C)(i); Rev. Proc. 2023-2*.